Journal: Thursday, September 08, 2005
• Set stop loss for Emulex (ELX, news, msgs) at $21.22.
Trend Trader Lab Performance
Round 12 $121,651.94
Lab Summary Page
Portfolio
--------------------------------------------------------------------------------
Track Richard's investments on Trend Trader's portfolio page.
Journal Entries
--------------------------------------------------------------------------------
Follow every buy and sell with Trend Trader's Transactions page.
Discuss the latest trades
on the Strategy Lab
message board
A seasonal trend in communication equipment
Last Thursday, per my previous column, I bought an initial position in storage provider Emulex (ELX, news, msgs) at $21.22, and then added to the position yesterday at $21.72 and once again added to the trade today at $22.22. Thus far, the trade is working out quite nicely – with only one leg left to add at $22.72. Now, I want to bring my stop loss back down to my initial entry point at $21.22. My $26-$30 target range remains valid.
As noted in my previous columns, communication equipment makers have over the past 4 years shown a propensity to rise from September through December. I am trading this seasonality via a long position in Emulex and am now prepared to do so via QLogic (QLGC, news, msgs), which happens to reside in the very same space as Emulex. This remains a risky bet to be sure, but once again we are adding to our position as it becomes profitable. I have a nice lead on Emulex -- now I want to become even more aggressive with QLogic.
Earnings for QLogic are to be released in approximately 5 weeks; hence I believe prices will trade higher into the report at a minimum. Beginning today, I want to establish a 60% position in QLogic at the market in and around the $35 level. I then want to add a 40% position on a trade to $35.90. My target is somewhere in the low-$40’s.
Unlocking value via divestiture
On Aug. 29, QLogic announced a definitive agreement with Marvell (MRVL, news, msgs) to divest themselves of the hard disk (HDC) and tape drive controller businesses for $225 million. Of this, 80% was in cash, with the remaining 20% in Marvell stock. This puts QLogic on a pure play playing field with Emulex -- QLogic’s estimated HBA (host bus adapter) revenue will be approximate 70% of its total, whereas Emulex’s is around 81%. As I write, Emulex is hitting 52-week highs, whereas QLogic is still $8 and change below its 52-week high. I expect this gap to narrow leading up the earnings call in October.
That said, I obviously don’t believe the market is valuing QLogic in its proper relative light to Emulex. In fact, if I look at the simple ratio of Emulex to QLogic, I find the ratio rather skewed toward Emulex, with the ratio sitting at its highest level since June 2004. Another manner in which one would play the position is to be a buyer of short seller of Emulex and a buyer of QLogic on an equal dollar spread basis; however, with Emulex moving to new 52-week highs, I prefer to own both of them.
|
